How to avoid credit card debt: lessons from Japan

Personal finance

Let’s pretend that in order to sign up for that shiny new Mastercard, you:

  1. must give Mastercard your checking account number and allow it to withdraw money from that account
  2. aren’t allowed pay Mastercard by check
  3. must sign an agreement to pay 10% of the outstanding amount on the card every month if you don’t pay it in full each month; and
  4. must announce to, say, the teenage waitress at Chili’s and in front of your friends that you’ll have to pay for the fajita plate and Corona you just bought for dinner over the next few months because you can’t pay off your credit card in full that month.

Wouldn’t these things deter you from using your credit card? That’s downright batty, you say? Well, guess what, it’s also reality in Japan. No wonder cash is still the preferred method of payment there.

BBC News had a news story this week on . This isn’t new or novel, but what I found fascinating was that the article stated that in Japan, less than 1/10th of consumer spending is paid for by credit card. (Hence the reason DoCoMo, Japan’s largest mobile service provider, thinks it can take advantage of Japan’s obsession with technology to provide this new service.)

In comparison, 25% of purchases are paid for by credit card in the US, and most of my friends and I use credit cards for purchases almost 100% of the time.

So what gives? Is it the tendency of Japanese consumers to save instead of spend that’s at play here? You might think so, but the reasons for differences between US and Japanese credit card usage are a little more complex.

It turns out that credit cards in Japan aren’t quite the same as those in the US. In this country, we write checks to Visa and Mastercard to make minimum, partial, or full payments each month. In Japan, checks don’t even exist. Instead, Japanese credit card holders must link their bank accounts to their credit cards, and the amount owed is withdrawn at a predetermined date each month. So, credit cards in Japan act really more like in the US.

in Japan is also slightly different because it’s not flexible. Rather than having the option to pay off a minimum amount each month, the credit card holder agrees to a preset payment schedule (e.g. a percentage or flat yen amount each month) at the time the card is issued.

And, saving the best for last:

The designation of the transactions as revolving generally must occur at the cash register – with an admission to the sales clerk that the cardholder does not plan to pay for the purchase out of current income.

I’ve summarized and quoted from a report I found published in 2001 from Robert Mann, a professor at the University of Michigan Law School. It’s worth reading, but like all law publications, quite heavy on notes. If you’re curious, you can download the full report, called (scroll down the page for download options).

By the way, the report is a few years old, so if it’s out of date or anyone knows if the situation has changed in Japan, feel free to correct the content I’ve written here!


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2 Feedbacks on "How to avoid credit card debt: lessons from Japan"


I know this is an old blog item, but it was so interesting I had to comment. (Great blog, by the way, you’ve got a new reader today!)

I too pay as much as I can by credit card, but I am using it as a FORM OF PAYMENT, NOT AS A LOAN. I pay the full balance every month and reap the reward offers without every paying the CC companies a dime of interest. I’ve done this throughout my entire 11-yr credit history, and while I know many people with credit troubles I also know I’m not alone in responsible payment behavior either.

Now, while I say “Viva Japan” for most of the credit card features you mentioned above, the last thing you listed baffles me:

Do you mean to tell me that I would be REQUIRED to tell a waitress in Japan that I plan to pay over a few months at unsecured interest rates, when I know darn well I’m paying the full amount and actually earning cashback on it rather than paying any interest? Do you have more info on what type of verbal statement is required? And what happens if you don’t make the statement?


If I read the article correctly, yes. (It’s an academic article, but you can read the relevant section by clicking on the link above and going to page 30.)

Unfortunately, the article doesn’t discuss what happens if you don’t make that statement or what you exactly have to do. It just states that consumers have to do it, and the reason no one’s come up with a product to fill this seemingly huge opportunity is that the banks in Japan aren’t set up for it, focusing mostly on large loans. The bottom line seems to be that credit cards in Japan are really more akin to debit cards here in the States.